What is one of the key differences between Germany and other European countries in terms of financing innovative young companies? For Michael Schatzschneider, representative of Euronext Germany, the answer is simple: there are hardly any IPO’s of German early stage companies. Cultural & ecosystem differences seems to be the main reason for that phenomenon. Euronext’s TechShare program aims towards evening out this spread.
Foto © Euronext
Many challenges for young entrepreneurs starting a business might be similar all over Western Europe. The process from an innovative idea, over starting the business to the selling the first product in the market is not only time consuming but also expensive and mostly requires investors with deep pockets. But what follows the first rounds of seed financing may be much more challenging than many German entrepreneurs would imagine. While in Germany young companies don’t even bother to think about the stock market for fresh capital, in our neighboring countries like France the initial public offering (IPO) is a well-established financing strategy also for the early stage.
Difficult start for Life Science and Tech companies
A look at the differences in the conception of the stock market, which are historically rooted in a countries culture, offers a possible explanation: The traditional way of corporate finance in Germany has always been bank financing. Meaning that companies are required to be “bankable” overcoming regulatory hurdles and financial rankings. Following that logic, an IPO in Germany is traditionally perceived as the financing route for well established companies with revenues of around 50,000,000+ Euros, and profits. This makes it hard for young, research-intensive companies looking for equity financing of EUR 10m + to enter the stock market. Especially innovative businesses associated with life science or new technologies face regulatory obstacles and costly requirements in their early years.
Germany offers many initiatives to get seed funding for innovative ideas, but after the start-up phase of a company it’s often hard to get financing. This results in a paradox: As products and services grows more and more successful the need for capital grows even faster. Meaning that the successful companies with great market potential can be faced with financial struggle. It’s often problematical that some innovative products start in niche markets—a common phenomenon in the highly technological field of b-to-b products in life science and IT. As a consequence, many businesses are highly dependent on private investors in their second and third round of financing. With no real access to the stock market, strategic or financial investors are almost the only options exposing the young companies and their founders to significant dilution and some problematic concessions like minimum return and liquidation preference clauses.
The European version of Nasdaq
Just a few kilometers across the border, the situation is different. “We have a completely different view on what it means to be ready for the stock market.”, says Michael Schatzschneider, who is a director and Germany Representative for Euronext. Euronext is the leading in the Eurozone. With around 1,300 listed issuers Euronext aims at becoming the European version of Nasdaq. Located in Paris, Brussels, Amsterdam, Dublin and Lisbon, Euronext is the main pan European Stock Exchange for technology SMEs building a bridge between European companies and international markets. This is reflected in their international client base: Around 35% of all SME investors are from the US/UK. While an IPO at Nasdaq might be very difficult and costly for a company from Europe, Euronext combines the benefits of a local support network with contact to international investors. Those are ideal conditions for innovative enterprises. The big majority of businesses that went public at Euronext in 2017 and 2018 YTD belong to the tech industry.
TechShare – a program to prepare young companies for IPO
In September 2018 Euronext will start their successful TechShare program, designed to help young companies to grow their business, also in Germany. The program is meant for tech companies aspiring to grow and interested in an IPO within the next one to three years. To reach this next stage of development Euronext brings together the executives of those promising fast-growing SMEs with renowned entrepreneurs, academics and experts, e.g. lawyers or financial advisors. It complements educational training with aspects of a mentoring program to familiarizes the tech companies with the financial market. The nine-month program consists of campus seminars, technical workshops and one-to-one coaching sessions. In the end, the companies’ CEOs can decide if they feel ready to tap the capital markets and willing to initiate an IPO at Euronext.
A successful challenger for the Deutsche Börse
Since its launch in 2015 Euronext has coached 145 companies, mostly from France and other Euronext locations. Still this number does not even represent the huge interest in this unique kind of program among young European companies. To earn one of the limited slots, companies must apply beforehand. For those who get into the program it’s completely free of charge. The whole program is sponsored by Euronext and its German partners—a smart way to reach out to promising companies and to interest them in an IPO at one of its stock exchanges. This way both parties benefit from the comprehensive program, which doesn’t have an equivalent in Germany yet. Even “Scale”, the program of the Deutsche Börse for SMEs, which also tries to help young businesses, is directed at another target group. “Most LifeScience companies we have here at Euronext would not even have met the requirements for Scale but they are doing very well on the stock exchange attracting international investors“, notes Michael Schatzschneider. Therefore, the program start of TechShare is good news for German companies—and an inconvenient one for the Deutsche Börse. Euronext challenges the German understanding of the stock market and ensures to be the first to get in touch with the Big Players of tomorrow.
by Julia Arndt, Rudolf Schulze Vohren, Michael Schatzschneider
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